Will Trump Use Poland to Set a Precedent with the Kremlin?
With Donald Trump’s inauguration looming, many are focused on what his economic and trade policies will look like in the early days of his presidency. But it’s quite possible that his defense strategy could be his first policy in the spotlight. The U.S. is in the process of deploying 4,000 soldiers to Poland, one of the largest deployments in Europe since the Cold War. Russia, naturally, sees it as a threat. If tensions escalate, it could be Trump’s first major test as President; and the first of many black or grey swan events of 2017.
All eyes are on America’s military this week. First, Donald Trump’s pick to lead the Pentagon, retired Marine General James Mattis, has insisted that Russia is the top threat to U.S. interests and said the U.S. must be ready to confront the Kremlin. To better equip the U.S., Mattis has called for Congress to lift spending caps, which he says are undermining U.S. military readiness. (Source: “Trump’s Pentagon choice says U.S. needs to be ready to confront Russia,” Reuters, January 11, 2017.)
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The deployment, which is part of NATO’s Operation Atlantic Resolve, was initially launched in response to Russia’s “annexation” (or invasion) of Crimea in March 2014. (Source: “US tanks and troops in Poland a threat, Russia says,” BBC, January 12, 2017.)
The buildup will fan out to six other North Atlantic Treaty Organization (NATO) countries in the area, including Romania, Bulgaria, and Hungary, and the former Soviet states of Estonia, Latvia, and Lithuania.
Not surprisingly, the move has annoyed Russia, with the Kremlin calling it a “threat on its doorstep.” A doorstep that was increased after the country’s annexation of Crimea.
Chances are good that the Kremlin will not really do anything retaliatory in the hopes that Donald Trump would rather work with Russian President Vladimir Putin than confront him, as Trump suggested during the campaign trail.
The Kremlin may not want to hold its breath. James Mattis has already called Russia the biggest threat to the U.S. and backed NATO. Despite his dislike for NATO, it seems unlikely that Trump will pull out of the Atlantic Resolve after he becomes President on January 20.
Trump to Rebuild National Defense
While Trump has said he is tired of the U.S. being the policeman of the world and says it is a financial burden, Operation Atlantic Resolve could be just the thing Trump needs to ramp up his national defense strategy.
During his election campaign, Trump told Polish-Americans that the U.S. would be a reliable ally if he wins the election. He praised Poland with keeping up-to-date with its payments to NATO, havings accused other U.S. allies of not paying their fair share. (Source: “Trump Tells Polish-Americans He’s Committed to Poland’s Strength,” Bloomberg, September 28, 2016.)
Before the election, Trump also outlined his national defense strategy on his web site. Trump notes that the U.S. army is the smallest it has been since before World War II; the Navy is among the smallest since before World War I, and the Air Force is the smallest in history. (Source: “National Defense,” Donald J. Trump web site, last accessed January 12, 2017.)
To counter the apathy of the Obama administration—and by extension, Hillary Clinton as Secretary of State—Trump hopes to get rid of budget caps and work with Congress to rebuild the country’s military. This will include increasing the size of the U.S. army to 540,000 active duty soldiers, rebuild the Navy towards 350 ships, provide the U.S. Air Force with 1,200 fighter aircraft, and grow the Marine Corp to 36 battalion.
Best Defense Stocks for 2017
While America’s relationship with Russia may not exactly constitute a black swan event, since we have a long history with Russia and a mutual desire to remain on Earth, escalations in Poland could lead to a grey swan event.
Unlike a black swan event, a grey swan can be anticipated or predicted to a certain degree. Though, like a black swan event, the outcome and potential impact on the market remains unknown. And the implications can be huge. Just ask billionaire George Soros, who lost close to $1.0 billion after Trump’s “unlikely” election win.
The NATO buildup in Poland could lead to a grey swan event. It’s quite likely that Trump will make strengthening the military a major priority. He could also invoke the ghost of Ronald Reagan, who defined the Republican mantra of “peace through strength.”
This, of course, did not mean war at any cost, but rather that peace was the end goal and strength was the means. Even as a deterrent, a military buildup and escalating tensions will have a direct impact on the broader markets.
By design, some sectors thrive under uncertainty and conflict. These defense stocks are definitely worth keeping an eye on in the coming weeks.
Case in point: the iShares Dow Jones US Aerospace & Def.ETF (BMV:ITA) is up more than 11% since the U.S. election. Specifically, Raytheon Company (NYSE:RTN) is up 10%, as is Lockheed Martin Corporation (NYSE:LMT). Meanwhile, Heico Corp (NYSE:HEI) is up 17% and Huntington Ingalls Industries Inc (NYSE:HII) is up approximately 30% since before the election.
